7 'psycho' money traps and how to beat them |
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Or how about when a real estate agent shows you two expensive homes first, then introduces you to two cheaper ones?
Again, the less expensive ones now seem like bargains, comparatively.
Thank a mental trick called "anchoring" for this habit, says Ariely. In short, he explains, our brains naturally latch
on to the first price we see in a new-to-us purchase category -- thus creating an "anchor" against which we compare all other prices.
"This natural process helps us bypass the difficult decision of deciding what something new to us is worth," he says.
When you shop for a new TV, the price of the first one you seriously consider will be the price by which you compare
all new TVs. Similarly, Ariely explains in his book, when people move to new cities, they tend to compare home prices to what they paid
for a house in their previous city -- and spend the same amount.
Example: If a family previously spent $500,000 in an expensive housing market, they'll tend to pay that same price for a
house (a much nicer one, most likely) if they move to a cheaper rural area. They don't pay less for a home, even though they could.
How to outsmart your brain: In the case of a house, rent in a new city for a year, until your
brain adjusts to home prices in your new city. In the case of jewelry or other new-to-you items, don't buy in the heat of the moment just
after you find "bargain" items. Wait and consider your purchase for a while. Give your brain time to decide whether the "cheaper" bracelet
is really something you want to afford.
3. The instant-gratification attraction
We all know we should save for future goals like vacations, college
and retirement, but many of us still don't. Why? Because, "you feel
that you need a cup of coffee and, by the way, that pair
of shoes is to die for. So you spend the four bucks at Starbucks
or you buy the new shoes, because both kinds of spending give you
the intense pleasure of an immediate reward -- especially if you
pay with a credit card," says Jason Zweig, personal finance columnist
for The Wall Street Journal and author of "Your Money & Your Brain."
What about that longer-term goal? "It carries no emotional kick whatsoever. What's rewarding about setting money aside today
for a goal two or three decades away?" he says.
How to outsmart your brain: Infuse your future goal with emotion. Visualize that next vacation in
Europe or that retirement cottage in Mexico in as much detail as you can.
"If your financial life is not yet computerized, take
a manila folder and paste color illustrations to it: Pictures of
palm trees and surf on the Hawaiian coast, Tuscan hillsides covered
in grapes and sunflowers, or sand and sun in the Gulf of Mexico,"
says Zweig. "If you are online, set up a file on your desktop and
download a bunch of images to it."
Zweig also encourages you to add dates and colorful names to financial goals, such as "The Jan. 23, 2034, Tuscany Villa Fund."
Now could you forgo that caramel latte and put a little money in that savings account? This practice is also used effectively in weight-loss
programs: Dieters learn that it's easier to give up a piece of chocolate cake today if you clearly visualize the trade-off, such as yourself
in that elegant dress three months from now at your daughter's graduation.
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